So, will it be a ‘V’, a ‘U’, or a Nike-style tick? Over the past few weeks economists have offered just about every letter of the alphabet as a possible depiction of our economic future. A ‘V’ would be the best outcome, but a ‘U’ is far from the worst that has been suggested. An ‘L’ shaped recovery would be no recovery at all, but an economy which flatlined at a lower level. If you are a real pessimist you might already be preparing for an ‘I’ shaped future – that is to say that the economy keeps on sinking until we are pretty well back in the stone age.
So which is it to be? The advantage of having a monthly drop of 20.4 per cent in output – as measured by the Office of National Statistics for April, and released last week – is that it is hard to imagine things getting any worse. There is almost bound to be some kind of rebound in May. It may well surprise us on the positive side, too. Last week the British Retail Consortium (BRC) – which is a leading indicator, a month ahead of the ONS – published its retail sales figures for May. They showed a 5.9 per cent drop compared with May 2019. That is a sizeable year-on-year fall, but nothing like as calamitous as April, when sales plunged 19.1 per cent year on year. Looking month-on-month, sales rebounded strongly between April and May – not bad considering that most shops remain closed. The only liberalisation the government allowed during the month was to allow garden centres to reopen. However, many DIY stores – which had not been ordered to close in the first place but voluntarily chose to do so – also decided to reopen.
Long queues outside Primark and other High Street stores on Monday will have cheered many in the business – although it is important to note that a long queue to enter a socially-distanced store is not to be compared with a queue for the traditional January sales. With everyone ordered to stand 2 metres apart it only takes 100 people to form a 200 metre long queue. Yet this number of people would disappear without trace in a large store. Unsurprisingly, baby clothes were reported to be among the best-selling items on the first day – as parents attempted to keep up with fast-growing offspring. Shops are winning back custom on the back of sharp discounts, which will impact on their profitability.
One cause for optimism is that people will emerge from lockdown with less credit card debt and more savings than they went in. According to the Bank of England, consumer credit fell by £5.3 billion in April. In March net savings in banks and building societies rose by £14.3 billion, followed by £16.2 billion in April. Moreover, going into this recession households were less indebted than they were going into the last recession in 2008/09. In the last quarter of last year household debt stood at 127 per cent of disposable income. In the second quarter of 2008 it was 147 per cent. Interest rates are on the floor and, with many people on generous furlough payments than on unemployment benefits, as they would have been in previous recessions, household income has remained artificially high.
Of course there will be a price to pay for the bailouts. The public deficit for this financial year is forecast to come in at over £300 billion – twice that run by Gordon Brown in 2009/10. That was followed by a decade of ‘austerity’ (ie restrained public spending rises) and sluggish economic growth. Homeowners who have taken advantage of mortgage holidays will have to make up their missed interest payments at some point, which will suppress their income possibly for several years.
But in the short term, the government’s bailout package should help to boost activity. It is very likely, therefore, that over the next few months we will see what looks like a ‘v’ -shaped recovery – or at least a Nike-style v, with a shallower up slope than a downslope. It seems improbable that we will see a ‘U’ shape, with the economy remaining for months on end at the shrunken size it was in April.
What happens after that is another matter. One possibility which hasn’t been much discussed in the possibility of a ‘W’ shaped recovery, where growth returns quickly, only to be knocked down again, perhaps as a result of a second spike of the virus. One thing which is certain, however, is that the coronavirus crisis will suppress growth over the next few years as the huge public debts have to be paid off – or at least serviced.